As An Investor, What Cap Rate Do You Shoot For?

[Jacob O'Connor]

Hello fellow investors! 

I am curious to know what cap rate you shoot for on your properties. Do you even use cap rate? Does it change via market? What market are you in? All thoughts and comments are welcome! 

[Justin Hoggatt]

The asset class is certainly a consideration, along with the condition of the asset, and it's location.  If you look at apartment buildings, for example, a class A building can sell for a cap rate in the 4's, a class B and C in the lower 5's, and anything else around upper 5's to low 6's in the Denver market.  You have different sized markets and generally the larger and better performing markets will have better terms on loans and subsequently lower cap rates.  Higher down payments required and the cap rates will go up a bit.  Also, the Triple Net Leases can be a much lower cap rate because there isn't much you have to do except take a check.  An apartment building requires more management, and then moving on to what we are doing in the RV Park asset class, the cap rates are even higher because the management is even greater along with a product that generally takes longer to sell as well.

We use Cap Rate as a quick and easy metric to check value on the investment and what the seller is offering, but by no means is it the only calculation we're doing. The amount of investment required along with deferred maintenance or other Capex items that we feel is necessary to get the property into a condition we feel good with, is all calculated in our returns and investor CoC and ROI and IRR.

If you're comfortable getting outside of the Austin market, I'd consider other areas outside of Austin.  Of course, right now your appreciation in that market is likely driving down cap rates and increasing investor interest and demand-another reason why cap rates will vary.